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This week, Fred Wilson raised an idea that is gaining a lot of attention. The idea is to provide a means for venture investors to be able to cash out their investments in startups without having to wait for an IPO or an acquistion. Wilson's idea is to create a public market for institutional/sophisticated investors so that "stocks" in startups could be traded. He elaborates further in this video.

Essentially, a lack of liquidity constrains the funding/investing process because money is tied up that could otherwise be going to fund new companies, etc. Also, because investors have to factor in illiquidity risk, it increases the cost of funding new companies.

Given that illiquidity or inaccessibility to funding seems to be a common concern in Hawaii, this approach could be a significant help to Hawaii startups. Thoughts?

Tags: IPO, capital, entreprenuers, market, stock, venture

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A public or large private market for companies at the venture stage sounds interesting. I wonder what the criteria for investors would be. I assume the qualified/accredited investor rules would apply. I wonder if the SEC would impose additional restrictions.

I embedded the video for our readers' convenience:
Interesting idea. Although liquidity is crical, return on investment is key. Investors are not likely to want to sell their stake in a company until the company's valuation is sufficiently high to provide a good return. Early stage companies without a lot of sales or profits would have a hard time justifying a high enough valuation even in a quasi-public marketplace to satisfy the typical Angel or professional venture investor in terms of ROI. I also suspect that even a quasi-public market such as this would be subject to some degree of scrutiny. I believe that Hawaii companies can already go "public" in Hawaii (only), though they have to register with DCCA to sell their stock and there is a fair degree of reporting and scrutiny. An IPO is afterall just another form of financing. Yes, it cashes out investors, but it also raises cash and lets the public market establish a market capitalization that a company can use to secure other types of financing. This idea is worth some further thought. Thanks for bringing it up.
I agree that this would be a poor fit for early stage companies. However, I do think it could play a nice role for companies that are more mature but not able to IPO or unwilling to be acquired.

For instance, 4 to 7 year old companies often have revenue in the $10 to $25 M range and a slowing or minimal burn rate. Such companies are usually not large enough to IPO but have a demonstrable track record of success that could generate a reasonable valuation in a quasi-public market.

Also, this could help increase ROI as returns are a function of value appreciation and time. A 400% return over 4 years generates a higher IRR than a 700% return over 7 years. Plus, it's common for value appreciation to be higher in earlier years than in later years (as companies mature, earning acceleration inevitably decreases, even Google). When that is the case, VCs can generate higher returns by accessing exits like these and putting funds to work in earlier stage companies.

Thanks for the feedback. I was not aware about going "public" in Hawaii through DCAA. Interesting.
We had a presentation at our December 2007 HVCA luncheon from firms that take companies public on the London Stock Exchange AIM program which is designed for smaller companies. Much less red tape than going public on a US exchange, good for cashing out early investors, and a stepping stone to going public in the US. Here is a link to the video of the program. Seems like a good fit for the size companies you are talking about.

http://www.hvca.org/video.aspx?name=HVCA~presents~David~Kent,~John~...

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